Several weeks ago, my team and I got together on Zoom to talk about how much money you really need to live the life you want in retirement and how to make sure you’re on track to do just that. Here’s the recording and the transcript, in case you missed it.
Hello, everyone. Welcome to our webinar today. I’m Lesley Buck from Pennsylvania Capital Management. I’m joined with Irvin Schorsch, our founder and president, and also Christopher Mallon and Andrew Randisi, who are both certified financial professionals here at Pennsylvania Capital Management. Our webinar topic today is how much money do you really need to live the life you want? And I will throw it over to you, Irvin, to get us started.
Irvin Schorsch:
Good morning everyone. I’m glad you can join us today. I just finished reading an article where the magic retirement number was $1,460,000 and that’s absurd. There’s so many factors that are involved with what is the right number you need to live the life you want, especially as you enter retirement. Andrew, what’s your take on this?
Andrew Randisi:
Sure. I would say that, when you’re looking for in retirement, you’re going to want to ask yourself the question, how should I replicate my income? And that’s going to come from a couple different monthly revenue streams for you. First, I would say for most of us, and we’ll talk about this a little bit later, Social Security benefits are going to be a important part of what’s monthly, comes in the till each month. Then if you are fortunate to be one of the very few that still has a pension, pension benefits, monthly pension benefits will be another portion that’ll stack right on top of the social security. But for the vast majority of us, we’re going to be drawing on what we have saved in our nest eggs, whether that be in a taxable brokerage account or a qualified retirement account.
Irvin Schorsch:
Interesting. Chris, any thoughts you want to add here?
Christopher Mallon:
Yeah, I think when we, I’d read this article and saw it, I laughed a little thinking [inaudible 00:01:58] very common question we get for pretty much all of our clients is what do I need when I retire? Right? It’s a very normal question to ask. A lot of new clients will ask that, I don’t think there’s ever been a time, unless you have, Irvin, before I started here, have told anybody you need $1,460,000 or you need a million or you need 10 million. It’s never been a specific number off the top of your head. There’s a lot, like you said, Irvin, that goes into it. It’s usually our response when someone says, “What do I need to retire?” Is usually, “I don’t know. What does it cost you to live now?”
That’s the first question and then that is usually a hard to answer question for many folks and you start there and kind of have to get in the weeds, do the math on building an amount. Okay, if you were to take X amount out of your portfolio over your retirement lifetime, which now can be 20, 25, 30 years, this is how much of a cushion you would need for us to feel the warm and fuzzies that, oh, you’re not going to run out of money. There’ll be stuff to pass onto your heirs if that’s a goal of theirs.
So yeah, the specific number thrown out always gives us pause and many advisors pause, saying like, “Okay, there’s more to it than that. It depends.”
Irvin Schorsch:
Actually, I think if we look at the variety of questions we get, another big one is, “I’ve heard I can live off of 4% of my principal forever. Reality or bogus? What do you think?
Christopher Mallon:
I’d say a little bit of both, and there’s two ways to go about it. What I like to, the history of the 4% rule, which is the common rule of thumb thrown around, is again, how much can I pull out of my portfolio safely over my lifetime and not run out of money? That 4% number came from looking back, if I were to take out X percent over 10, 15, 20, 30 years, looking at historical market returns, that 4% got you through even the worst series of returns afterwards. So if you retired somewhere in the ’70s, before very long, bear market, 4%, you made it through.
However, not all markets over that period of time perform that poorly. So the real number fluctuates and it really does depend what you’re getting from the market, how you’re invested and what your spending is as well. So there’s a lot of things out of your control as to what’s a safe number.
There are different professionals now that say 3%’s the new number due to higher amounts of inflation and volatility in markets. There’s some people that say, “Oh, the market gives you seven to 10, you can take seven to 10.” There’s probably happy middle ground there. So again, it’s one of those things, it depends and you have to do the math.
And my favorite way to go about doing it with clients is really look at that number every year and give somebody a budget. “Hey, if you’re [inaudible 00:04:57] this band, you’re safe to spend,” which really gives people a lot of confidence, right? It’s like, “Hey, you can take that extra trip. You’re spending 2% of your account a year, you can live a little bit larger.” Or the opposite case happens as well, be like, “Hey, you’re drawing out closer to that 7, 10, 12 number. Let’s try and bring it back down to something that’s a little bit safer.” So it’s a good rule of thumb that can be adjusted year to year versus looking at year one and then living with that number forever.
Irvin Schorsch:
Just to add to that, in the 28 years since PCM was founded, I’ve seen a very wide disparity depending on how excited, the retirees that we’re discussing, of course, get about, let’s call it the extra spend. It’s the second trip to the Seychelles Islands after the trip to Madrid for two weeks, followed by the new portion. It doesn’t work very well. Too big a monkey wrench into that mix of let’s say distribution levels for the clients.
So it’s really important, as Chris was just saying, that we re-examine every year, we see what went on. Was it a tough market? Were there some excess expenses? And look, that’s part of the role we serve as fiduciaries to help them see if they need to pull things back a bit as far as their spending or they’ve been very, very reasonable over the last three or four years, the markets were supportive. We were able to develop the proper asset allocations, so the combination of the two make for some more flexibility.
Christopher Mallon:
Irvin, what are some expenses you see clients not necessarily plan appropriately for in retirement? So we see a lot of clients who go through retirement years. Where are some things people come in, a lot of times we get a new client who has just retired and then they think they have enough, and then things kind of come up, what have you seen?
Irvin Schorsch:
Here’s the big one, healthcare costs. People may be lulled into this sense of, “Everything’s okay, I’ve got medical insurance.” Well, a lot of the exceptions these days, even for Medicare, you’ve got to pay, there’s copays. And if it’s out of network and your doc is one that you love dearly, then you’ve got to pay extra because the out of network bands, meaning the amount that they’re willing to cover, are a lot larger before Medicare might or whatever insurance you have might kick in. So we find that’s something we have to study, what are the degrees of excess spending due to medical costs? Or if someone gets sick or they have an accident and they need additional medical care, that’s a big one.
Some of the other ones that are top of mind would be if you develop a new expensive hobby. I mentioned the Porsche example earlier, but if you decide all of a sudden that you want to rotate your car on a two-year lease because you want to try new cars, that adds a lot to the budget.
Or another big one is one of the kids has problems. Maybe they need medical help or psychiatric help or something else. Those are very big costs and that’s a big deal.
Lesley Buck:
Or also, I would add care for your parents. We have a lot of clients who are hitting retirement and still caring for elderly parents.
Christopher Mallon:
They call it what? The sandwich generation. So you’ve got kids who are just coming out of school who might need some support in various ways, and then you’ve got parents who are in those 80s or 90s, still living longer lives and they might have started to run out of some funds because when they retired, longevity wasn’t late 80s, mid-90s, it was 70s and 80s. So yeah, definitely you can get squeezed in two different directions from two sides now,
Andrew Randisi:
And besides healthcare, what a lot of people often overlook is income taxes. Especially with a lot of our clients that you’ve thought you’ve done a fantastic job, you’ve saved a couple million in your 401(k), your 403(b), your IRA, and it’s all pre-tax dollars. When you try and draw that, that million bucks or so is not yours. Part of it’s Uncle Sam’s too, because he’s allowed you to defer all those gains for a 30, 40 working year career. But now it comes time, Uncle Sam wants his payday. And depending upon your age, you’ll have to take required minimum distributions starting either at 73 or 75. And that’s often thing, sometimes we have some clients go, “But we spent 180.” But it all came out of your IRA, so really, that 180 is more like closer to 200,000, 200 plus thousand dollars you really need to spend when you account for Uncle Sam’s cut too.
Christopher Mallon:
Yeah, and that’s why determining that spend rate really year to year, the tax planning is really important because we talk about when we’re looking at clients who pull, especially if they’re taking a little bit more than that 4, 5, 6, 7% range of the account, it can create a tax snowball, really. Yeah, is what we say here is the fact that it’s like, okay, they need 100, 200,000, like you said, 15, 20, sometimes 30% more than that would be the gross number that comes out of the account. All of a sudden, that, “Hey, I’m only spending four or 5% of the account,” when you’re actually spending closer to six because you have to factor in the taxes on top of it, which yeah, I’d say that, along with long-term care, severely overlooked as well.
Irvin Schorsch:
Andrew, is what you spend during the working years the ultimate determinant of what you can afford to spend in retirement? What have you found?
Andrew Randisi:
I’d say it really depends what lifestyle you want to maintain, whether that’s 100% of your [inaudible 00:11:15], 100% of you lifestyle expenses during your working careers, or oftentimes, we could see you may want to only live off of 70 or 80, with that occasional trip. Wanting to plan what you want to forecast in retirement is probably the best way to go about doing it.
So as Chris had mentioned before, we want to find out, we want to start with the end in mind to determine if you have enough saved. Or you might need to either want to still want to continue to work in retirement to support that full life, maintain that full 100% lifestyle, or you may need to delay retirement a little bit longer.
Christopher Mallon:
Yeah. Yeah. No, I agree with that. I think, because we have various amounts of clients here, some will be big earners and big livers, some will be lower earners, but not big livers, and then vice versa. It’ll spin all around. And a big factor that comes with that too, to help answer that question is what do you want to leave to your heirs, if anything?
So a lot of times, the math is easy, right? I have retired, I have one million, two million bucks. I spend X amount, assume this growth rate, how long will it last? Another wrinkle in there is how much do you want left over to pass on? And that can be sometimes clients come with us and say, “Hey, this money’s for me. The kids are launched, everything’s good. If we run out with zero, perfect.” Okay, that gives you a little bit more wiggle room.
The other case is, “Hey, when I pass, I want each of my kids to have a million dollars,” and you’ve retired with two or $3 million saved. It’s like, okay, that changes what your lifestyle looks like now. And there’s some different planning techniques around that, that we can work around.
But yeah, that’s another big factor as well. It’s not necessarily, “Hey, I’m used to spending $200,000 a year on living. I want that to stay the same.” Say, “Okay, do you want anything left over, some or a lot?” That’s a big determining factor as well.
Irvin Schorsch:
You know what, team? I think another big one is that clients in their working life know what they’re used to in their working life. But as they approach retirement, they really have no clue on how it’s going to be different in retirement, what it costs in retirement and what it’s going to be like. So very often, we’ve got to say, “Well, let’s try it out together. You’re going to begin retirement. Let’s do a new lifestyle expense overview. Let’s see how things go.” What are some of the kinds of things you see [inaudible 00:13:50] radical changes between working life and retirement life amongst our clients?
Christopher Mallon:
Yeah, I’ve seen it does vary a lot person to person, but I’d say almost a lot of people cut back more than you would think because they’re not working anymore. So they know almost subconsciously that income’s not coming in anymore, so they go into a saver’s mindset.
And then there are others, the total flip side of that coin is like, “Okay, I have all this time on my hands, I’m joining a country club.” Like you said, “I’m going to travel every six months and not travel on the cheap either.”
So it’s really one of those two things and it’s almost never in between. I think we found it’s either someone goes in a big saving mindset or a big spending mindset.
Irvin Schorsch:
Andrew, how do social security income and medical benefits fit into this retirement picture in your experience?
Andrew Randisi:
For social security, those benefits, depending upon where I’d say you kind of are on the income scale. For more your higher earners in life, social security is not going to make up too much of supporting your average monthly expenses. But for some of our if you’re in the middle class socio-economic status, social security benefits are going to make up at least 50 to 60% of what your check, of what your ongoing monthly income is. It’s very important to be able to strategize the different opportunities of when you can take your benefits. Can start as early as 62, or depending upon your full retirement age, that can be anywhere from 65 to 67 depending upon your birthdate.
Depending upon how much you have saved and how long you really think family longevity is in family history, you can even defer your benefits and get an 8% increase each year by deferring to 70. That can have a more meaningful impact, especially on your finances if you’re able to live off your nest day and defer your social security to be able to, especially if you think you’re going to live longer.
Medicare is kind of another interesting part because that’s going to, when that starts at 65, that’s going to replace your traditional medical insurance that you’ll be able to have, you’ll have your part A, your part B, which is your traditional Medicare. And then depending upon how you choose, you can go the Medicare Advantage route, which will give you access to in-network doctors, as well as some other benefits as well, dental, vision. But it can be limited with some higher out-of-pocket copays, or if you want a more comprehensive plan, you can go with the Medigap and a part D prescription drug plan.
Lesley Buck:
If I could interject, we actually had a question from an attendee on that, Andrew, about the importance of the social security decision when you start taking social security and how does one make that decision? Is that something that a fiduciary advisor would normally help with making that decision?
Andrew Randisi:
Oh, most definitely. That decision, it’s very important depending on, especially so if it’s married couple, because there can be some opportunities there where you might want to decide which spouse has the highest benefit. The higher earning spouse may want to defer their benefits to get the max. That way if that spouse should pass away, the surviving spouse keeps the higher benefit. There’s different planning techniques we have, especially with our software, that we can strategize what the timing of social security looks like and how that affects your overall portfolio.
Christopher Mallon:
Yeah, that’s important because that, we talked about the tax ramifications of taking money from qualified accounts or paying capital gains when you’re taking money out. The social security piece is obviously taxed as well, but taxed a little bit differently. So it plays into that too, that’s kind of a lot of planning that’s done is, okay, you might think in your head, “Rule of thumb, I’ll just let it defer forever.” It’s like, okay, that might make sense on paper. However, if you’re pulling from sources that are going to be taxed at worse rates, perhaps, okay, it makes sense to take it a little bit earlier.
Yeah, and again, it plays into longevity as well. A lot of, I’d say more and more recently than even a couple years ago, some are worried that there’s not going to be any money left, so they want to take it as soon as they can. And then there’ll be others who think it’s like, “Hey, look, longevity is not something that is in my family. I’d rather have the money in my 60s versus having a benefit later in my 80s because I’m going to be active in these first 10, 15 years of retirement, moreso than the last 10 or 15.”
Lesley Buck:
And once you make that social security decision, it’s set in stone, right? You can’t reverse that.
Andrew Randisi:
You can reverse it, but you’d have to pay back all the money you’ve gotten. You have to give them full restitution if you want to, say I collected for a year, I changed my mind. You have to pay it all back.
Lesley Buck:
Oh, okay.
Christopher Mallon:
Do you just write them a check? Or do they just wait until-
Andrew Randisi:
You write them a-
Christopher Mallon:
… your next [inaudible 00:19:14] go to pay it back and then-
Andrew Randisi:
No, you give them the money back.
Christopher Mallon:
Yeah, you actually have to write them a check. All right.
Andrew Randisi:
Yeah.
Christopher Mallon:
I didn’t know that.
Irvin Schorsch:
That’s a mighty bitter pill to swallow. That’s a big one.
Christopher Mallon:
So it’s an IOU until, I guess you said, “All right, I’m sticking with it.”
Irvin Schorsch:
I think as we take a look at families dealing with retirement, one of the big questions is what happens to your family if you die early? And I want to take just a few minutes here and talk about how essential a fiduciary who can be your partner is in a situation like that. Everyone hopes they’re going to live a very, very long time. Some do, some don’t. Unfortunately, we don’t happen to have that knowledge as to exactly when any one of us is going to pass on. But if it does happen, having your fiduciary, either individual or firm, with you to be able to make all the proper changes, regroup, figure out what needs to be done, make sure that your benefits, that your, let’s call it the structure of your investment management, your asset allocation is based on those essential ingredients that your family needs to survive.
So I think this is a very important juncture where, for the listeners here today, that’s something to study. Check with your fiduciary to make sure you’ve got those pieces in place just in case something happens. Team, do you want to add other ideas to that one?
Christopher Mallon:
Yeah. Like you said, I think it’s important to have a team in place, or at least somebody you can go to, especially as a, say something happened to my parents tomorrow, both. It’d be like, fortunately they do work with us. We know where a lot of stuff is, and it’s kind of easy to figure out that way. However, say they worked with somebody else or nobody at all, I’m not entirely sure how easy it would be for my sister and I to go through their stuff. They’re down in Florida, they don’t live nearby. To figure out where all the pieces are, right? I don’t know who I would call. Where do I find out? I’d be sifting through files in my dad’s office and hoping to figure it out. So that’s not ideal for anybody.
Andrew Randisi:
They didn’t make you a book? Like Steve [inaudible 00:21:44]. In case I die, pull this out of the drawer.
Christopher Mallon:
Not that I’m aware of, so maybe there is. Hopefully, that will be there on top of the desk when I walk into the office.
Lesley Buck:
Just waiting for you.
Christopher Mallon:
But I don’t know. Yeah, so [inaudible 00:21:57]-
Irvin Schorsch:
That would only happen if they knew they were going to die.
Christopher Mallon:
That too. Yeah.
Lesley Buck:
Right.
Christopher Mallon:
Exactly.
Irvin Schorsch:
And also, if you take it a step further, think about it. This is one of the big problems in America. People don’t plan. They don’t take the time, they don’t make up a book like that. And more importantly, unless they have a fiduciary that they’re working with and they’ve been successful in life and they’ve spent a lifetime amassing their own nest egg, be it a small fortune or a big one, that’s why you have trusted professionals that work with you.
Lesley Buck:
I think that’s actually probably a great spot for us to wrap up. And it reminds me of the issue really that when people see, like you guys mentioned in the beginning, in the article, that the new number is 1.46 million. I think oftentimes, people are looking for just a quick, easy magic number. “Okay, if I get to that number, then I’m done.”
And as you guys have nicely explained over the last half hour or so, it’s not a quick, easy number. You have to do some work. You have to plan what you want your retirement to look like. You have to plan how much you’re going to spend, what your expenses are, what they could grow to. You have to plan tax questions like you guys discussed and social security questions. It’s not quick, one-hit answers, and I think you guys have clearly demonstrated that. Irvin, do you want to add anything to that as we wrap up our webinar today?
Irvin Schorsch:
I do. For our listeners that have spent this time with us, I hope we’ve challenged you. I hope you’re thinking long and hard about have you asked right questions of your advisor? If you haven’t, get on the stick. This is a very important subject. You certainly want to be in a position where it’s well-thought-out so that at night, when you put your head on the pillow, you rest comfortably knowing we got it. We figured out what we need. We work with a great professional, either an individual fiduciary or a team, who’s putting our best interest as the client ahead of the firm’s interest all along the way.
Life is going to change. So my words of wisdom to you today as a takeaway are make sure things are in good order and check it frequently. This is not once every 10 years or 20 years, life continues to change at an exponentially expanding pace. So you should be checking in every year plus with your fiduciary firm to make sure you’re on track. Whatever changes you’ve dealt with in your family are clear and handled. And we’re very glad you could join us today.
Lesley Buck:
Good to see you, everybody. Take care.